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Microsoft's Week Involved Apple, Shakeup, Alcatel Appeal

Microsoft's week involved a number of shakeups. First, the departures of two top executives from the Entertainment and Devices Division sparked questions among analysts about Microsoft's consumer product lines and need to compete more heartily against the likes of Google and Apple in that area. Then Apple's market capitalization, based on stock price, passed Microsoft's, sparking another round of outside analysis. Despite a tough week, Microsoft CEO Steve Ballmer insisted that his company remains the most profitable technology concern on the planet.

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Microsoft's week involved some major shakeups: in addition to the departures of two top executives from its Entertainment and Devices Division, responsible for consumer products such as the Xbox and Zune, the company also saw its market capitalization briefly surpassed by that of Apple. Both those events highlight the degree of vigorous competition that Microsoft faces in the tech world, particularly with regard to mobile.

The departed executives included Robbie Bach, president of the Entertainment and Devices Division, and J Allard, the unit's senior vice president of design and development. Allard will apparently remain onboard in an advisory capacity to Microsoft CEO Steve Ballmer, while Bach will "retire" in order to devote time to family and nonprofit endeavors.

"Robbie has been thinking about the possibility of retiring and spending more time with his family. He and I thought on whether we should go ahead and announce that now or wait until after Christmas," Ballmer told reporters in Singapore May 26, according to Reuters. "In the consumer business, it has to be way before Christmas or way after Christmas. ... I'm happy to make the transition and announce it now."

Despite Microsoft's casting the executives' decisions to leave as personal ones, though, speculation abounded that the resignations were driven instead by the division's underperforming products. Its Windows Mobile franchise has been losing market share in the competition against Google Android, Apple's iPhone, and other brands; the revamped mobile operating system, Windows Phone 7, is scheduled for rollout later in 2010, but could face headwinds in the lack of clear upgrade path for devices currently running Windows Mobile 6.5 or earlier.

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Meanwhile, its Zune HD portable media player has been widely praised for its look and user interface, but experienced poor sales; the Xbox game console has only recently become profitable after years of losses.

"Certainly, the trend has been away from Windows Mobile overall, and Zune hasn't done well," Roger Kay, an analyst with Endpoint Technologies Associates, told eWEEK. "And even Xbox 360's best days may be behind it. That doesn't leave much on E&D's plate."

The shakeup involves executives swapped into new roles, with hints of a broader reorganization of the division's reporting structure. According to a May 25 statement by Microsoft, "Senior Vice President Don Mattrick will continue to lead the Interactive Entertainment Business and Senior Vice President Andy Lees will continue to lead the Mobile Communications Business. Each will report directly to CEO Steve Ballmer effective July 1."

"This has been a vampire division since its inception. A vampire division is one that lives off the value created by the rest of the company and, from a corporate perspective, does more damage than good," Rob Enderle, principal analyst of the Enderle Group, wrote in an e-mail to eWEEK. "Its profit, which wasn't much, was massively offset by the economic cost it caused to the corporation and it needed to be rethought."

News of the Microsoft readjustment came just as Apple, which a decade ago seemed on the brink of collapse, surpassed it in market capitalization; on May 26, the Cupertino, Calif.-based company's market cap reached $227.1 billion, based on its stock price, eclipsing Microsoft's at $226.3 billion. That was enough to make Apple the most valuable U.S. technology company, and second on the list of highest-valued American companies behind Exxon Mobile with a $282 billion market cap.

Ballmer said during a trip to New Delhi that, despite the news, he remained confident in his company's ability to compete and return value.

"It's a long game. We have good competitors but we, too, are very good competitors," Ballmer told an audience, as reported by AFP and other media outlets. "I will make more profit, and certainly there is no technology company on the planet that is profitable as we are."

Overall, he reportedly insisted, "We are executing very well."

Microsoft's primary successes continue to be its core businesses; since its launch in October 2009, Windows 7 has sold some 90 million licenses. The company's next flagship product, Office 2010, is due to roll out to consumers in June.

Microsoft also faced some issues on the legal side of things, suffering a setback May 24 in its long-running patent-infringement dispute with Alcatel-Lucent when the U.S. Supreme Court declined to hear the software giant's appeal. A previous ruling by the U.S. Court of Appeals for the Federal Circuit had upheld the verdict against Microsoft, but overturned a $358 million judgment.

"We are pleased, but not surprised, that the Supreme Court rejected Microsoft's appeal in this case and left intact the jury decision in the federal appeals court that our Day patent is valid and that Microsoft infringes it," Alcatel-Lucent spokesperson Mary Ward said in a May 24 statement to Reuters. "We look forward to the upcoming trial in San Diego district court to determine the compensation to which Alcatel-Lucent is entitled based on Microsoft's infringement."

A Microsoft spokesperson had no comment on the matter to eWEEK. The company finds itself embroiled in a variety of other legal actions at the moment, including a patent-infringement lawsuit leveled against it by Toronto-based i4i. Microsoft also fired an intellectual property suit at Salesforce.com, accusing the cloud-based services provider of infringing on nine of its patents.

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